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Sokes
Topic Author
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What is inflation?

Sun Nov 15, 2020 4:38 am

From
viewtopic.php?t=1454073
flyguy89 wrote:
meecrob wrote:
but the point is that cheaper prices that are gained without an increase in manufacturing efficiencies means someone is getting fucked over.

Not exactly. I'm sure your average Chinese bloke who previously worked poverty wages in the fields but now has a better paying factory job would disagree that he's getting ripped off. As would the consumer who can now affordably purchase the product the factory worker is making.

meecrob wrote:
America was based on doing things better and more efficiently, not cheaper.

You do realize we absolutely built our manufacturing base off doing things cheaply, right? Late 19th / early 20th century America was basically the China of today.


Speaking of Germany:
Consumer products are still cheap compared to 20 years back.
So are restaurants. However these are often run by foreigners who are willing to work for low salaries.
Meat is dirt cheap. Again: the slaughterhouses employ people from the poor parts of Europe. Several of these people may share a flat provided by the slaughterhouse.

However if I read how much a new railway line costs I wonder what value money still has. Such infrastructure doesn't depend on cheap imports or cheap foreign labour.

Similar properties: Inflation numbers exclude properties, maybe because people always have the option to sleep under a bridge? :cloudnine:
Inflating money supply may not affect prices of most products for years. But it shows fast with property prizes.
If properties had to be included in inflation numbers, central banks would have more difficulties in inflating away gambling debts of the super rich investors.

I suppose the more educated people profited from productivity increases the last 20 years, less educated not so much.


India:
Housing markets just went mad. I believe to have observed the following:
Countries with balance of trade deficit get a booming housing market. Add central bank money supply.
Does trade surplus depress housing markets?
I suppose Japan and China suggests no, Germany yes. Or maybe there was simply enough housing in Germany?
Obviously with 0% interest housing markets can't be stable.

What products/ services in which country showed surprising high/ surprising low inflation?
 
LCDFlight
Posts: 1260
Joined: Wed Jan 01, 2020 9:22 pm

Re: What is inflation?

Sun Nov 15, 2020 2:54 pm

Inflation is the movement of prices.

As you say, there are 2 kinds of inflation / deflation:
1. the pure effect of changes in the money supply;
2. changes to global trade and technology, including the trade for labor (millions of Latin American workers being added to the US). Also including factories that make electronic goods at a cheaper cost than before.

The US has seen certain things rise in price, and other things not rise. The cost of food is fairly constant. Cost of gasoline and cars (and air travel) has been fairly constant for like 25 years. Cost of real estate, health care and education have risen. The cost of a television has fallen. The cost of shoes has been constant for 25 years.

This has coincided with some Americans income rising (approximately doubling) in 25 years. Consider them the top 10-20%. And a whole other gigantic proportion of Americans, about 50%, have seen zero rise in income, while costs overall have risen.
 
KlimaBXsst
Posts: 1000
Joined: Wed Jan 23, 2019 4:14 pm

Re: What is inflation?

Sun Nov 15, 2020 3:12 pm

It’s bad ... you don’t want it.

Your PAYCHECK stays the same,
but your gallon of milk at the grocery.
store goes way up in price.

So you have less money to buy candy bars for you wife and kids. We had this under President Carter it was awful.
 
GalaxyFlyer
Posts: 8318
Joined: Fri Jan 01, 2016 4:44 am

Re: What is inflation?

Sun Nov 15, 2020 4:08 pm

Inflation is always a monetary phenomenon, “too much money chasing too few goods” to quote Dr. Kim, my microeconomics prof. The price changes, up or down, of specific goods is NOT, by definition, inflation, just changes in relative prices. Real median income in the US set a record each of the last three years, finally returning to its previous record set in 1999.

Inflation becomes a tax on savers and on the poor who have fewer ways to avoid it.
 
LCDFlight
Posts: 1260
Joined: Wed Jan 01, 2020 9:22 pm

Re: What is inflation?

Sun Nov 15, 2020 4:40 pm

GalaxyFlyer wrote:
Inflation is always a monetary phenomenon, “too much money chasing too few goods” to quote Dr. Kim, my microeconomics prof. The price changes, up or down, of specific goods is NOT, by definition, inflation, just changes in relative prices. Real median income in the US set a record each of the last three years, finally returning to its previous record set in 1999.

Inflation becomes a tax on savers and on the poor who have fewer ways to avoid it.


To be practical though, the CPI (Consumer Price Index) is the change in prices of particular stuff. When those prices change, that equals the rate of inflation, in the most common measurement. Milton Friedman did say "inflation is always and everywhere a monetary phenomenon." So it would be foolish to not agree with that. I think his limitation (if I'm not mistaken) is it is debatable how much the money supply really should or shouldn't grow, to cause a particular change in consumer prices. To keep prices constant, how much should money supply grow? It must depend on growth and technological change... and other stuff.

I _think_ Friedman's point was that regardless of the cause of movement in prices, the regulator (Fed) has ultimate power to set the rate of inflation, through their interventions.

I don't know what goes into it, but the Fed has been pretty surprised by the low inflation numbers we have seen despite epic money injections.
 
GalaxyFlyer
Posts: 8318
Joined: Fri Jan 01, 2016 4:44 am

Re: What is inflation?

Sun Nov 15, 2020 5:40 pm

Yes, the CPI uses a basket of consumer goods which has shown to be more “generous” than the GDP deflator measure. The basket has items that go up and down. How accurate the basket measures real world purchasing, changes in quality and consumer substitution has always been a concern. An Apple Mac has shown fairly constant pricing but with huge increases in quality and productivity—how to measure it? A $1,000 1998 desktop vs. a $1000 2020 laptop?
 
KlimaBXsst
Posts: 1000
Joined: Wed Jan 23, 2019 4:14 pm

Re: What is inflation?

Mon Nov 16, 2020 1:15 am

GalaxyFlyer wrote:
...

Inflation becomes a TAX on SAVERS and on the POOR who have fewer ways to avoid it.


Well put.
 
Sokes
Topic Author
Posts: 2773
Joined: Sat Mar 09, 2019 4:48 pm

Re: What is inflation?

Mon Nov 16, 2020 1:26 am

LCDFlight wrote:
I don't know what goes into it, but the Fed has been pretty surprised by the low inflation numbers we have seen despite epic money injections.

That's because of money velocity.
https://en.wikipedia.org/wiki/Velocity_of_money

Double the money at half the velocity makes stable prices.
Many companies now keep enormous amounts of money on their account. Interest is cheap and it guarantees that they can stay solvent even should there be problems. Money which is "just lying around" doesn't affect prices,

A second reason is international credit.
Increased money supply won't increase prices if the money is lent to another country.
However it will increase prices in that country, at least real estate prices.
A look at property prices in emerging economies is interesting.
What if investors become nervous and want to bring their money back?

Once people loose trust in the value of money velocity will increase.
 
tommy1808
Posts: 14662
Joined: Thu Nov 21, 2013 3:24 pm

Re: What is inflation?

Mon Nov 16, 2020 5:44 am

Sokes wrote:
Meat is dirt cheap


You have a misconception, meat is dirt cheap because it has become an anker product for advertisement grocery stores do..... used to be butter and coffee, now it is meat. So that price is artificial, the producer prices however have a pretty reliable upward trajectory well above average inflation values.

Development of producer prices of meat and meat products in Germany in the years 2000 to 2019:

Image

Source: Statistica, https://de.statista.com/statistik/daten ... utschland/

KlimaBXsst wrote:
GalaxyFlyer wrote:
...

Inflation becomes a TAX on SAVERS and on the POOR who have fewer ways to avoid it.


Well put.


which savings exactly do poor people have to be effected by inflation? People living from paycheck to paycheck are not effected by inflation, unless their employier keeps reducing their pay.

KlimaBXsst wrote:
Your PAYCHECK stays the same,
but your gallon of milk at the grocery. store goes way up in price


your paycheck staying the same is unrelated to inflation, employers ability to use inflation to lower your wage is just a sign of a broken Labor market that has employees powerless. With a working labor market wages increase by inflation + a share of improved productivity.

best regards
Thomas
 
KlimaBXsst
Posts: 1000
Joined: Wed Jan 23, 2019 4:14 pm

Re: What is inflation?

Mon Nov 16, 2020 2:06 pm

tommy1808 wrote:
Sokes wrote:
Meat is dirt cheap


You have a misconception, meat is dirt cheap because it has become an anker product for advertisement grocery stores do..... used to be butter and coffee, now it is meat. So that price is artificial, the producer prices however have a pretty reliable upward trajectory well above average inflation values.

Development of producer prices of meat and meat products in Germany in the years 2000 to 2019:

Image

Source: Statistica, https://de.statista.com/statistik/daten ... utschland/

KlimaBXsst wrote:
GalaxyFlyer wrote:
...

Inflation becomes a TAX on SAVERS and on the POOR who have fewer ways to avoid it.


Well put.


which savings exactly do poor people have to be effected by inflation? People living from paycheck to paycheck are not effected by inflation, unless their employier keeps reducing their pay.

KlimaBXsst wrote:
Your PAYCHECK stays the same,
but your gallon of milk at the grocery. store goes way up in price


your paycheck staying the same is unrelated to inflation, employers ability to use inflation to lower your wage is just a sign of a broken Labor market that has employees powerless. With a working labor market wages increase by inflation + a share of improved productivity.

best regards
Thomas


Hey man.

Ok not going to argue with your pretty University charts and graphs.

Having lived through it, during the inflation years of Carter, there was less money for food and meat on our dinner table, cause prices went up and pay stayed the same.

My Dad worked at a fortune 500 type of company, and had a good paying job but had to work overtime constantly to make ends meet. So apparently the theoretical world and the real world are intersecting here. I appreciate your reply all the same.

Your graphs may portray one thing, but the austerity we knew first hand at the time is testimony to reality.

People I state again, YOU DON’T WANT inflation.
 
tommy1808
Posts: 14662
Joined: Thu Nov 21, 2013 3:24 pm

Re: What is inflation?

Mon Nov 16, 2020 2:14 pm

KlimaBXsst wrote:
So apparently the theoretical world and the real world are intersecting here.


that is the broken labor market thing i was talking about. Here last years inflation is the starting point in each and every wage negotiations ..... Unions still work here.

People I state again, YOU DON’T WANT inflation.


I absolutely do want inflation. On the leisurely 1~2% pace central banks are aiming for. If you think Inflation is bad* wait until you life through a deflationary cycle.....

best regards
Thomas

*Yes, in the time frame you are referring to inflation was out of control.
 
KlimaBXsst
Posts: 1000
Joined: Wed Jan 23, 2019 4:14 pm

Re: What is inflation?

Mon Nov 16, 2020 2:18 pm

tommy1808 wrote:
KlimaBXsst wrote:
So apparently the theoretical world and the real world are intersecting here.


that is the broken labor market thing i was talking about. Here last years inflation is the starting point in each and every wage negotiations ..... Unions still work here.

People I state again, YOU DON’T WANT inflation.


I absolutely do want inflation. On the leisurely 1~2% pace central banks are aiming for. If you think Inflation is bad* wait until you life through a deflationary cycle.....

best regards
Thomas

*Yes, in the time frame you are referring to inflation was out of control.


Yikes, but okay! We can agree to disagree! Regards!
 
Sokes
Topic Author
Posts: 2773
Joined: Sat Mar 09, 2019 4:48 pm

Re: What is inflation?

Mon Nov 16, 2020 2:29 pm

Let's throw in another question:
Is inflation necessary?
If yes, how many % per year?
 
KlimaBXsst
Posts: 1000
Joined: Wed Jan 23, 2019 4:14 pm

Re: What is inflation?

Mon Nov 16, 2020 2:36 pm

Sokes wrote:
Let's throw in another question:
Is inflation necessary?
If yes, how many % per year?


Inform us, cause I see you have a deep opinion.
 
KlimaBXsst
Posts: 1000
Joined: Wed Jan 23, 2019 4:14 pm

Re: What is inflation?

Mon Nov 16, 2020 2:41 pm

Inflation can

Also mean thinking one has more candy bars than one may actually have!


Just to lighten up a very dry, but insightful topic, with minds like myself who enjoy intellectual minds. We appreciate your charts and insights Thomas.
 
Sokes
Topic Author
Posts: 2773
Joined: Sat Mar 09, 2019 4:48 pm

Re: What is inflation?

Mon Nov 16, 2020 2:46 pm

KlimaBXsst wrote:
Hey man.

Ok not going to argue with your pretty University charts and graphs.

But I'm going to argue about it.
It's a 20 years chart, inflation is not dramatic.

My brother likes to buy lamb from the other end of the world in the supermarket freezer. That wasn't there 20 years back.

Maybe you are right if one buys with the butcher. I can't judge.

If I see the price of mince in the supermarket, I believe you are right. It must be something like milk earlier, one of the few products most people know the prize.
 
Sokes
Topic Author
Posts: 2773
Joined: Sat Mar 09, 2019 4:48 pm

Re: What is inflation?

Mon Nov 16, 2020 3:39 pm

KlimaBXsst wrote:
Sokes wrote:
Let's throw in another question:
Is inflation necessary?
If yes, how many % per year?


Inform us, cause I see you have a deep opinion.

I see you know me well.
 
GalaxyFlyer
Posts: 8318
Joined: Fri Jan 01, 2016 4:44 am

Re: What is inflation?

Mon Nov 16, 2020 5:49 pm

tommy1808 wrote:
Sokes wrote:
Meat is dirt cheap


You have a misconception, meat is dirt cheap because it has become an anker product for advertisement grocery stores do..... used to be butter and coffee, now it is meat. So that price is artificial, the producer prices however have a pretty reliable upward trajectory well above average inflation values.

Development of producer prices of meat and meat products in Germany in the years 2000 to 2019:

Image

Source: Statistica, https://de.statista.com/statistik/daten ... utschland/

KlimaBXsst wrote:
GalaxyFlyer wrote:
...

Inflation becomes a TAX on SAVERS and on the POOR who have fewer ways to avoid it.


Well put.


which savings exactly do poor people have to be effected by inflation? People living from paycheck to paycheck are not effected by inflation, unless their employier keeps reducing their pay.

KlimaBXsst wrote:
Your PAYCHECK stays the same,
but your gallon of milk at the grocery. store goes way up in price


your paycheck staying the same is unrelated to inflation, employers ability to use inflation to lower your wage is just a sign of a broken Labor market that has employees powerless. With a working labor market wages increase by inflation + a share of improved productivity.

best regards
Thomas


The poor typically don’t have enough bargaining power with employers to keep up with inflation, see Venezuela, Argentina, Brazil. They also have meager savings, so the value is wiped out quickly and cannot escape the situation as easily as the wealthy. You connected poor AND savers, not me.
 
tommy1808
Posts: 14662
Joined: Thu Nov 21, 2013 3:24 pm

Re: What is inflation?

Tue Nov 17, 2020 5:31 am

GalaxyFlyer wrote:
You connected poor AND savers, not me.


So? PC Police going nuts over poor people not having savings? "Not having savings" is true for half of the US....

And poor people not having bargaining power is kinda a function of corrupt governments destroying unions or refusing to balance out the labor market by setting a reasonable minimum wage. Here minimum wage slides with inflation... not that hard to do.

best regards
Thomas
 
chimborazo
Posts: 445
Joined: Sun Sep 25, 2011 7:51 pm

Re: What is inflation?

Tue Nov 17, 2020 12:51 pm

Inflation in itself is fine in terms of prices going up as long as wages follow. But inflation is by its very nature exponential, so it may only go up a percentage or two but it aggregates. So if inflation is 2% year on year but - as happens at my company last year- wages stay static it opens a gap between prices and wages which only then ever increases over time even if there is the same percentage of inflation year on year.
A lot of economies are basically a giant Ponzi scheme which relies on ever increasing width at the bottom to keep the pyramid shape. This all links into climate change: the biggest problem is population explosion. But that is never put front and centre of the discussion. If population growth were controlled the pyramid would be lost and the whole system failed. So it is not in government interest to limit population growth/consumption and ever increasing demand.
 
LCDFlight
Posts: 1260
Joined: Wed Jan 01, 2020 9:22 pm

Re: What is inflation?

Tue Nov 17, 2020 3:32 pm

Yup, inflation is not necessarily bad. 2 countries to highlight are Japan and Italy. Both countries have lost _multiple generations_ of progress arguably because their inflation is too low. It means young people are not able to buy property as long as they live, because wages have gone down, but property prices are locked in at a higher level. It means families cannot move, for the same reason. It means businesses cannot pay off their old assets, because they grow more expensive over time instead of cheaper.

Both countries are less able to pay their national debts too, because they are not inflating away. A 2% rate of inflation helps keep things moving while being pretty acceptable to the population. The US has done a good job finding a middle ground.
 
Sokes
Topic Author
Posts: 2773
Joined: Sat Mar 09, 2019 4:48 pm

Re: What is inflation?

Fri Nov 20, 2020 11:46 am

Sarah Wagenknecht argues that the history of credit is the history of credit default.
Interest in her opinion was the fee to carry the risk.

As agricultural societies are quite static interest and interest on interest are a mathematical impossibility. From time to time one had to kill the Jews to reset the system.

What about industrial societies? Assuming stable population and 2% yearly productivity gains, 2% real interest would be possible.
After WW2 productivity gains were higher than that, so we consider even 4% interest as "natural". But since working population in many industrial countries are shrinking or will shrink soon, what is a stable rate of interest?

What can be a stable investment?
-A house ages. Roofs, electrical lines, windows... have long life, but not eternal. The value of a house shrinks.
Do land values at least increase?
I read stories of areas in Germany with lot of housing and not many jobs where somebody couldn't sell the house for the cost of the renovation.
-Gold or raw materials don't change. But cost of extraction fluctuates, so does demand.
-Unless there is a draught, forests should increase in value. Are forests the only save investment for old age?

So it should be quite natural that one looses value while saving. If this is so, how to tell a 20 year old to save for retirement?
One of the areas with my strongest convictions is retirement benefits:

"In social insurance, PAYGO refers to an unfunded system in which current contributors to the system pay the expenses for the current recipients. In a pure PAYGO system, no reserves are accumulated and all contributions are paid out in the same period. The opposite of a PAYGO system is a funded system, in which contributions are accumulated and paid out later (together with the interest on it) when eligibility requirements are met."
https://en.wikipedia.org/wiki/PAYGO

Germany's paygo system survived two world wars including currency reforms. I'm hostile to funded systems.

Assuming a stable rate of real interest (interest rate - inflation rate - cost of banking) is -1 to +1%.
Why would anybody give money to the bank? Isn't it necessary to fool savers? Give them a higher rate of interest for many decades and destroy a good part of his wealth from time to time, maybe once in every generation?

Since honest theft would be repulsive to our sense of justice, we have central banks. Pretty civilised compared to earlier treatment of Jews.

At the moment there is a huge bet going on. If one dumps huge amounts of savings on developing countries their governance may improve to such an extend that increasing productivity there will make high real interest possible again. E.g. funded retirement systems of some industrial countries dump huge amounts of money on India.
From my impression of India I believe that bet will work out, at least for some countries.
Well, some bets are won, some are lost. The longer the current system is maintained, the more governance will improve. Only some years back I thought all that stupid money will be lost. But governance did radically improve, it just took around one and a half decades.

Positive "side effect":
The world's poorest billions finally go to bed with full stomach.

If that bet works out, savers are lucky and can continue to enjoy good real interest. If not their savings at least did a lot of good.
Am I wrong then to be hostile to funded retirement systems?

Thoughts?
 
Sokes
Topic Author
Posts: 2773
Joined: Sat Mar 09, 2019 4:48 pm

Re: What is inflation?

Fri Nov 20, 2020 12:41 pm

Sokes wrote:
Assuming a stable rate of real interest (interest rate - inflation rate - cost of banking) is -1 to +1%.

Mistake:
Cost of banking is included in interest rate.

Real interest also depends on demand. Under severe housing shortage it may be higher.
But a long term stable real interest should not exceed productivity gains - cost of banking
 
User avatar
EA CO AS
Posts: 15866
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Re: What is inflation?

Sun Nov 22, 2020 5:59 am

KlimaBXsst wrote:
Having lived through it, during the inflation years of Carter, there was less money for food and meat on our dinner table, cause prices went up and pay stayed the same.

People I state again, YOU DON’T WANT inflation.


During the Carter administration, we had runaway inflation coupled with a stagnant economy, or as it became known, "stagflation." The worst of both worlds.
 
QF7
Posts: 33
Joined: Fri Aug 16, 2019 11:42 pm

Re: What is inflation?

Fri Nov 27, 2020 9:36 pm

My goodness, this thread is full of misunderstandings and confusion. There are plenty of good books on the subject - I suggest reading one or two of them.

A couple of comments, if I may...

If you own real assets you want inflation, although at a controlled rate. That house you bought for say $65,000 when you were 35 is a godsend when you sell it for $250,000 (or more) thirty years later. Grandfather’s old coin collection might be worth 10x by the time you sell it.

Houses do not lose value if they are maintained well. Sure you might need to replace the roof every ten years or so. That may feel like a cost at the time but it’s really an investment in the future value of the property.

The actuarial difference between funded and unfunded retirement plans is immaterial so long as the population paying into the plan is growing faster than the population receiving benefits. But the societal difference favors funded plans in that such plans have large pots of money that need to be invested somewhere and access to capital is a good thing for start-up companies, developing countries, and, well, any enterprise that can yield good returns on the money.

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